‘ If they go bust, so will you
’ Beware of dominant customers
When you owe a supplier £ 10,000 and are struggling to pay, you have a problem. If instead you owe £ 1 million, your creditor has a problem. When you deal with large customers, it’ s reversed. They have a tendency to owe you a lot.
That’ s why dealing with large companies that dominate your business is hard. If they end up owing you a lot of money, you have a big headache. If they go bust, so will you. Their business risk becomes your business risk, but you don’ t control it.
It’ s very tempting to take more and more business from one client, particularly if it’ s easy to win and profitable. Once a customer is more than 10 % of your business in a year some red lights should be flashing.
Getting more cash in place
The more cash you have in place, the less chance of running out. However, don’ t try raising money when the business is in decline and no other actions are being taken to fix the problem. Better to just shut down.
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The following are the main ways of raising cash:
• Keep your profits in the business by keeping your salary and dividends low. That’ s the easiest way to grow your capital footprint, the least risky and leaves you in control of your destiny.
• Get a bank loan. This increases your business risk as someone else may become the master of your destiny. Avoid personal guarantees if at all possible but remember if you haven’ t created a limited liability company your personal assets will be at risk anyway and you could be declared bankrupt.
• Use leasing or specific loans for all equipment purchases.
Planning cash flow
Prevention is better than cure. Every business should draw up a cash flow forecast. The first step for this is an accurate sales forecast, and in my opinion, this is where efforts should focus. A sales forecast should be regularly prepared, and probably updated quarterly in the light of current trading. Previous sales forecasts should be compared with actual sales so that the forecasting process can be improved over time.
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The sales forecast should then drive the cash flow forecast, which should be re-done monthly and again history compared to see how the forecasting model can be tweaked. Both underperformance and over-performance on sales should be modelled; it’ s amazing what will come out. You probably will need help. Matthew Stevenson of fast growing The Landscape Company has this simple advice:“ It’ s worth having a good accountant.”
The end of the line?
An unexpected cash flow crisis would probably be the death of your business as you will have no time to fix the problem. In these circumstances, none of us have anyone else to blame because there are plenty of things to do to head off the crisis before it hits. So think hard, tread carefully and all of the best with your business!
About the author Benjamin Dyer is CEO and co-founder of Powered Now. Powered Now’ s mobile app aims to take the pain out of paperwork for installers and other small trade companies.
www. powerednow. com
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